On May 15, 2020, the Small Business Administration (SBA) issued the much-anticipated Loan Forgiveness Application (SBA Form 3508) for the Paycheck Protection Program (PPP). As described in Legacy News Flash 20-7, the recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act established the PPP to provide forgivable loans to small businesses and charitable nonprofit organizations to pay their employees during the COVID-19 crisis.
Through Form 3508 and its instructions, the SBA has provided detailed guidance for borrowers regarding the criteria for PPP loan forgiveness. Borrowers are required to submit to their lender the PPP Loan Forgiveness Calculation Form and PPP Schedule A; the Form also includes a PPP Schedule A Worksheet and an optional PPP Borrower Demographic Information Form.
Importantly, eligibility for loan forgiveness will be evaluated in accordance with the PPP regulations and guidance issued by SBA through the date that the Application is submitted. Although it is not yet clear when the Application is due to be submitted to the lender, borrowers may apply for forgiveness at the end of the Covered Period, which is the eight-week period that begins on the date the PPP loan was disbursed. Form 3508 has an expiration date of October 31, 2020.
The Application requires borrowers who received PPP loan proceeds in excess of $2 million to check a box, as a result of previous SBA guidance that the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, following the lender’s submission of the borrower’s loan forgiveness application.
Included in the Application are representations and certifications regarding the use of the loan proceeds for costs that are eligible for forgiveness, subject to the definitions and limitations set forth. The borrower must also certify the following:
- payments for the eligible payroll and non-payroll costs for which the Borrower is requesting forgiveness have been accurately verified;
- the required documentation verifying eligible costs were submitted to the lender;
- acknowledgement that if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges;
- information provided in the Application and all supporting documents and forms is true and correct in all material respects;
acknowledgement that knowingly making a false statement to obtain forgiveness of an SBA-guaranteed loan is punishable under the law, by imprisonment and/or fines;
- submission of consistent tax documents to both the lender and the IRS, and agreement that the lender may share the tax information with the SBA; and that
- failure to provide additional information requested by the SBA may result in a determination that the borrower was ineligible for the PPP loan or a denial of the loan forgiveness application.
Consistent with the provisions in the CARES Act, the Application provides for four general categories of costs that are eligible for forgiveness: payroll costs, business mortgage interest payments, business rent or lease payments, and business utility payments. Such costs must be paid or incurred during the Covered Period. No more than 25% of the forgiven amount may be attributable to non-payroll costs.
Forgivable payroll costs, which include employee compensation as well as health and retirement plan contributions, must be paid or incurred during the Covered Period. Employee compensation is considered to be “paid” on the day that paychecks are distributed or an ACH credit transaction is originated, and is considered to be “incurred” on the day that the employee’s pay is earned.
For administrative convenience, borrowers with a biweekly or weekly payroll schedule may elect to calculate eligible employee compensation using the eight-week period that begins on the first day of their first pay period following their PPP loan disbursement date (Alternative Payroll Covered Period). Borrowers who opt for the Alternative Payroll Covered Period are still required to use the standard Covered Period for all other costs.
The total amount of cash compensation that is eligible for forgiveness for each individual employee cannot exceed $15,385 (an annual salary of $100,000, as prorated for the Covered Period). Cash compensation is equal to the sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred.
The CARES Act provided that a borrower’s forgiveness relief is limited when there is a reduction in employee salaries or in the average number of full-time equivalent (FTE) employees during the Covered Period. The SBA’s guidance for calculating the average full-time equivalency is to take the average number of hours paid per week for each employee during the Covered Period (or the Alternative Payroll Covered Period), divide by 40, and round the total to the nearest tenth, capped at 1.0 per employee. A simplified method assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
Exceptions to the limitations include reductions related to any positions for which the borrower made a good faith, written offer to rehire an employee during the Covered Period that was rejected by the employee, and reductions related to any employees who during the Covered Period were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.
If the borrower reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020, and by no later than June 30, 2020 restored its FTE employee level to the level that existed during the pay period that included February 15, 2020, the borrower is exempt from the reduction in loan forgiveness based on FTE employees.
Loan forgiveness may also be reduced if salaries or wages were reduced by more than 25% during the Covered Period compared to the period from January 1, 2020 to March 31, 2020. However, this reduction generally does not apply to employees with compensation in excess of $100,000.
The instructions also direct the borrower to submit certain verifying documents with the Application and to maintain other documents, including the PPP Schedule A Worksheet, that are not required to be submitted. The new guidance also establishes a required retention period for all records relating to the PPP loan equal to six years after the date the loan is forgiven or repaid in full.
The lender must issue a decision on the loan forgiveness within 60 days of receiving the Application.
Guidance continues to develop through proposed legislation and updates to joint SBA and Treasury Department instructions.
Many borrowers will seek advice from their legal counsel with respect to certain aspects of the forgiveness process.
Please contact your Legacy representative should you need assistance or need further information.